Alluring biotechnology sotcks not for the faint hearted

In just two and a half years, Cochlear, which specialises in cochlear implant technology, has soared from $3 a share to around $16. And, some experts believe that there's still plenty more to be heard from the company.

In just two and a half years, Cochlear, which specialises in cochlear implant technology, has soared from $3 a share to around $16. And, some experts believe that there's still plenty more to be heard from the company.

Indeed, while some biotechnology shares, like Cochlear, have provided sharehold-ers with rather healthy returns, these stocks are certainly not for the faint hearted, as Godfrey Pembroke group manager of broking investment services Glen Castensen warns.

For one, their performance can be highly volatile. Biota's share price, for ex-ample, lost 65 per cent in one day when its flu drug Relenza was initially re-jected by the US Federal Drug Administration (FDA).

For another, some of these shares are already trading at such high price to earnings ratios that, according to RetireInvest equities manager Bob Birchall, investors may do better elsewhere

Cochlear's PE is at 50.2 times, CSL's is at 50.4 times and Progen Industries' is at a whopping 219 times.

"Investors should progress with fear and trepidation," says BT Funds Management senior vice president Frank Villante.

"The valuations of many of these shares seem rather stretched. The 'blue sky' inherent in these valuations require just too much faith and the risks in rela-tion to disappointment are very high," he says.

Like Internet shares, biotech stocks often have little or no earnings history. Indeed, several reported net losses for the last financial year, among them Pro-gen and Gradipore, which had seen its share price soar sky high over the year.

While just about anyone can set up shop on the Internet, established biotech companies usually enjoy high barriers to entry. But they often encounter a frus-trating lag between the time of a research breakthrough and the time it takes to get a product accepted by authorities like the FDA and, then, earning revenue.

The experts warn that these stocks are difficult to value as standard measures are often of little use. There is also a limited choice of these stocks in Aus-tralia and some have the added risk of being single product or application spe-cific companies.

Castensen says these stocks must be actively managed and believes that investors may be better off gaining exposure through a managed fund, even a US fund.

He suggests selecting a diversified portfolio of, say, 5-6 stocks which have global potential and are chosen for the different growth phases in their lives - but only as a small value add to a portfolio and never as its core.